Fair Trade?
Your Weekend, New Zealand (Fairfax)
Fair Trade?
1 November 2008
Nikki Macdonald (a senior writer for the Dominion Post) examines what we would get out of a free trade deal with the United States. Would it mutually beneficial, or are we looking to get slammed?
The alarm clock squawks you awake and you reach for your asthma inhaler to start the day. Damn, nearly empty. That’s another whack off the weekly budget. Drugs have got so much more expensive since the 2011 free trade deal forced changes to Pharmac’s bargain basement pricing scheme.
A quick brekkie and onto the bus to work, hooking up your MP3 player to break the boredom. You were lucky to pick that up cheap before they banned parallel imports, but you had to revert back to budget high street sunnies when your D&G parallel imports broke last month.
The grocery shopping’s got trickier too. There’s more choice, but you never know exactly what’s going into the kids’ dinner now they’ve abandoned labelling for genetically modified food.
Still, you wouldn’t have the new job, with its hefty pay rise, if it wasn’t for the electronics company doubling its staff after winning a huge deal to supply the US defence force.
It might seem academic, but free trade with an economic behemoth has the potential for real impacts on the life of the average Kiwi, and not all of them good.
When Prime Minister Helen Clark announced in September that the P4 group of Pacific Rim countries - Singapore, New Zealand, Chile and Brunei - would begin negotiating a free trade agreement with the United States, it was touted as a $1 billion bonanza for New Zealand. But negotiations mean concessions - traditionally reductions in the taxes or tariffs countries pay to get their exports into the country. But New Zealand has few bargaining chips left, having steadily reduced its tariffs since the mid 1980s. So the US will look to other areas for concessions.
Australia’s deal (AUSFTA), introduced in January 2005, is the best clue to the fish-hooks New Zealand can expect to encounter before landing the big one. That’s if you can make sense of the 271-page matrix of rules, inclusions and exceptions.
AUSFTA critic and co-convenor of the Australian Fair Trade and Investment Network Patricia Ranald believes the US free trade negotiating template is dangerously one-sided. "It’s very difficult when you’re negotiating with giants."
In Australia, the most controversial issue was medicine costs. Both the Australian Pharmaceutical Benefits Scheme and New Zealand drug-buying agency Pharmac use reference pricing - comparing the price and effectiveness of new medicines with the price of similar generic medicines - to keep drug prices on average three to four times lower than those in the United States. US negotiators tried to bin reference pricing altogether, but that was thwarted by public outcry, Ranald says.
Vocal opposition also blunted the bite of other potentially disastrous changes, says Dr Ken Harvey, of Victoria’s La Trobe University School of Public Health. Moves to shed light on the public drug buying process, coupled with a new right for drug giants to challenge those decisions, triggered fears of endless costly reviews. In fact, says Harvey, the call for transparency was turned back on the drug companies, increasing public access to their previously confidential information.
But a new Medicines Working Group gives US interests a say on drug funding policies, and changes last year could yet push up drug prices. The new legislation, which Harvey says is a direct result of AUSFTA, splits drugs into two funding streams, meaning new medicines are no longer compared with cheaper generics.
"That will almost certainly result in higher prices for innovative drugs without competition. One has to be very wary about these things. From a public health perspective you should never make concessions on social policy in trade deals. They are clearly used as a mechanism to try to undermine the pricing system that both New Zealand and Australia have."
New Zealand should expect the same battle over Pharmac, says Robert Scollay, director of Auckland University’s research centre focussing on economic issues in the Asia Pacific area. "Clearly the New Zealand government already realises that’s where it will have a fight on its hands. That’s one of our defensive issues."
But it’s not just the pharmacy that will be in US negotiators’ sights. The supermarket aisles could also become a battle ground, as consumers defend their right to know whether or not that can contains genetically modified corn. The United States Trade Representative’s 2008 National Trade Estimate Report notes the US has "raised concerns" about New Zealand’s biotechnology regulations, which include tight controls on growing GM crops. Our mandatory labelling for GM foods is, apparently, "extremely burdensome". In Australia, US negotiators tried to outlaw GM labelling, but consumers again won out, Ranald says.
Also under pressure will be rules to protect New Zealand land and businesses from mass overseas buy-ups. Worst case scenario, your kids’ favourite lakeside picnic spot could suddenly house a rich American’s condo. As part of its trade deal, Australia catapulted its foreign investment screening threshold from A$50 million to $800 million, exempting almost nine out of ten US investment deals.
Campaign Against Foreign Control of Aotearoa spokesman Murray Horton says New Zealand’s Overseas Investment Office already has a record of rubber-stamping foreign investment. But any easing of screening rules could limit the government’s ability to continue protecting sensitive areas like lake- and sea-shores and spawn a free-for-all on irreplaceable fish quota, Horton says.
The risk of losing access to the land that’s so much a part of who we are is obviously not lost on the government, which in October bought the stunning St James station near Hanmer, for fear it would be snapped up by an offshore buyer and lost to Kiwi trampers and holidayers.
Ranald says Australia ran into trouble with its relaxed investment rules in 2006, when the Federal Government attempted to still community disquiet at the privatisation of the Snowy Mountains hydro-electric scheme by capping international investment at 35 per cent and anchoring the scheme’s management in Australia. But the Prime Minister hurriedly pulled the sale, reportedly after a legal opinion warned the measures could breach AUSFTA’s rules preventing discrimination against overseas investors.
Another US target for concessions is intellectual property which sounds, well, purely intellectual. It’s not - any changes to intellectual property laws would have practical ramifications for the average Kiwi.
The so-called "Mickey-Mouse" provision (driven by Disney’s desire to milk more from the soon-to-expire copyright for the world’s most famous rodent) saw Australia extend its copyright period from 50 to 70 years after the death of the creator. New Zealand copyright and library expert Tony Millett says a copyright extension is unnecessary, especially as part of a free trade deal, and would limit libraries’ abilities to make old books more accessible by producing digital copies that can be easily searched and posted on the internet.
New Zealand’s decision to allow parallel imports of cheaper big-brand goods like designer sunnies, cameras and perfume - seen as a threat to copyright-holders and opposed by the United States - is also likely to draw fire. Any tightening of those laws would be a nightmare for shopaholics.
But perhaps the benefits justify the potential costs?
There’s no doubt quotas (limits on the amount of goods you can export) and tariffs seriously restrict New Zealand producers’ access to a wealthy middle class market - already our second biggest export destination.
New Zealand sold $685 million of beef to the US in year to June but, whacked with 26 per cent tariffs on any produce over the 213,402 tonne quota, $10 million disappeared in tariffs. We also exported $890 million of dairy products. Again, there are hefty charges for sales over quota limits - a paltry 22,500 tonnes in the case of cheese.
Who wouldn’t want to make it easier for New Zealand farmers to get their meat and cheese trussed between American burger buns, and for classic Kiwi brands like Swanndri and Macpac to make a buck in the United States? Not to mention Kiwi companies being able to bid for lucrative US government contracts.
Especially if it will bring in the promised $1 billion extra a year. That figure, quoted by Clark, comes from a 2002 report designed to promote the deal to the United States.
Scollay, who co-wrote the report, says the estimate was based on removal of all tariffs affecting New Zealand exports, and didn’t take into account any phase-in period (18 years in Australia’s case). While he still thinks that’s achievable, both countries have since signed trade deals with other countries and the numbers will have changed.
"I would not attach great weight to the precise numbers, but much more on whether the indicated effects are positive or negative, large or small." Nonetheless, he believes New Zealand still has a lot to gain from a deal.
As the world’s largest dairy exporter, Fonterra should be ecstatic at the prospect of easier and cheaper access to one of its biggest markets. But it’s far more cautious in its optimism.
"The degree of increased exports would depend on the outcome of negotiations. But the P4 initiative should also provide significant opportunities for US dairy exporters to increase exports into the Asia-Pacific region," a statement said.
The devil, says Lincoln University Agribusiness and Economics Research Unit director Caroline Saunders, will be in the detail. While there’s big potential for dairy, and for companies coveting lucrative US government contracts, the size of the bonanza hinges on New Zealand’s ability to silence powerful US lobby groups.
Even the NZ-US Council warns US dairy industry opposition is inevitable. "Unlike with Australia, the administration is not able to point to New Zealand’s status as an ally to overcome this opposition."
Nowhere has the detail devil been more evident than in Australia. Despite repeated promises by Trade Minister Mark Vaile that there’d be no deal unless it included all trade sectors, AUSFTA excluded the sugar industry altogether. Though Australian canegrowers produce around 4.75 million tonnes of sugar a year, they’re allowed to export just two tankerloads to the United States. And beef exporters have to wait 18 years to reap the full benefits of the deal.
Meanwhile the US got "the most significant immediate reduction of industrial tariffs ever achieved in a US free trade agreement" and immediate duty-free access for all its agricultural exports.
In the year following the deal, the value of America’s exports to Australia rose by US$1.6 billion, while Aussie exports to the US fell about $200 million. That prompted the US Trade Representative to crow "Free trade agreements are working for America". A 2005 survey by think tank the Lowy Institute found just over a third of Australians thought the AUSFTA was a good deal. Almost as many thought the nation had been shafted.
As former World Bank chief economist Joseph Stiglitz warned earlier this year, "Most of these free trade agreements are not good deals. They’re managed trade agreements and they’re mostly managed for the advantage of the United States, which has the bulk of the negotiating power. One can’t think that New Zealand would ever get anything that it cares about."
Dairy Australia trade and strategy general manager Chris Phillips says, quite simply, "We don’t have free trade with the US with dairy. That was never on their agenda. What we do have is meaningful improvements."
The US dairy lobby fought tooth and nail to exclude dairy, and even when negotiators thought they had the terms sewn up, election year came around and suddenly "all bets were off", Phillips says.
Up till the deal the industry sold about 7000 tonnes of cheese into the US, and that was about it. In the end, AUSFTA bought them immediate access for previously-excluded products like milk powders, cream, ice cream and specialty cheeses. But they’re still constrained by quotas.
When negotiations started the US was an upper crust market, paying top dollar. But drought and rocketing dairy prices elsewhere, particularly Asia, means many Australian dairy farmers won’t even use their full quota this year. But Phillips still thinks the deal was worth it, if only to open the door to a stable long-term market.
Swanndri chief executive Gerard Kilpatrick is excited by the idea of seeing more Yanks sporting his farmer-favourite shirts. There’s plenty of demand for the classic Kiwi bush-shirt, complete with pioneer story and feel-good image of woolly high-country merinos. "We do export into the US but there are quite prohibitive trade barriers on wool products."
But, as one of a string of Kiwi brands who’ve moved manufacturing offshore - Macpac, Skellerup, Icebreaker - he’s likely to get a rude surprise as details are agreed. The Australian agreement includes complex calculations to decide if goods qualify for preferential treatment. Anything manufactured offshore is out, even if made from Australian raw materials. And even if it’s made in Oz, if there’s too much offshore input - such as Asian yarn in textiles - it still might not qualify.
"It’s appalling," says Council of Textile & Fashion Industries of Australia executive director Jo Kellock. Her members have made no inroads into US markets since the AUSFTA deal. "It’s a very sore point here."
But Trade Minister Phil Goff is bullish. He concedes the AUSFTA was "not ideal, or close to ideal" for Australia, but is confident ours will be "a far higher quality agreement".
He argues the multi-party format will work in our favour, as the US is desperate to get a strategic foothold in the Asia-Pacific region. The probable addition of Australia, Peru and emerging market Vietnam will add further weight to the negotiations.
As well as major exports dairy and beef, Goff expects opening up of US government contracts, such as up to $14 billion worth of construction and service contracts involved with shifting the marines to Guam, to be a boon for New Zealand companies. Despite New Zealand’s decision not to sign up to the international agreement on government procurement because the disadvantages outweighed the advantages, he’s confident that’s not the case with the US.
He acknowledges that things like parallel importing, foreign investment rules and Pharmac’s practices will be a focus for US negotiators, and New Zealand will have to show some flexibility.
However, he’s promising to "staunchly defend" cheap medicines and to find a balance between consumer rights (parallel importing) and the rights of patent or copyright-holders.
"We don’t sign up to anything that would leave New Zealand no better off, or worse off. Our intent is that we’ll get far more advantages than any concessions we have to make."
If he’s right, great. But just in case, we should take Ken Harvey’s sound advice: "Be warned. Be very wary of apparently cosmetic changes, they can actually open up down the track into something more significant."
